Warren Buffett’s secretary pays a higher tax rate than he does. That’s completely legal.
You work hard for your money. The government takes 22% to 37% of it in taxes. But America’s billionaires? They pay just 24% on average, while regular taxpayers pay 30%.
Here’s what makes you angry: The tax gap costs us $600 billion every year. More than $160 billion of that comes from the top 1% who just don’t pay what they owe.
This isn’t about illegal tax evasion. These are legal tricks built right into our tax code. The wealthy hire armies of lawyers and accountants to find every loophole. You deserve to know how they do it.
In this guide, you’ll learn the 7 most powerful legal tax strategies that let billionaires pay almost nothing. Some of these tricks might work for you, too. Others show why our tax system is broken.
Let’s see how the rich really play the game.
1. The “Buy, Borrow, Die” Strategy – How to Access Billions Without Paying Income Tax
Imagine you own $10 billion worth of Amazon stock. You want to buy a $500 million yacht. Here’s what most people would do: sell some stock and pay huge capital gains taxes.
Here’s what billionaires do instead: they borrow the money.
How Buy, Borrow, Die Works
First, you buy assets that grow in value. Stocks, real estate, art – anything that goes up over time. You never sell these assets. Ever.
Second, you borrow money using your assets as backup. Banks love lending to billionaires. Carl Icahn had an outstanding loan of $1.2 billion with Bank of America, secured by Manhattan penthouse apartments and other properties.
Third, you die. Your heirs get the assets with a “stepped-up basis” (more on this later). All those capital gains? Gone forever.
The Numbers Are Shocking
Americans with more than $100 million hold $8.5 trillion in unrealized capital gains. That’s money that’s never been taxed.
In 2007, Jeff Bezos paid zero federal income taxes despite being a multibillionaire. He just borrowed against his Amazon stock instead of selling it.
Why This Works So Well
Borrowing money isn’t taxable income. The interest you pay on loans is often tax-deductible. Meanwhile, your assets keep growing tax-free.
Warren Buffett paid $125 million in federal taxes from 2014 to 2018. But his wealth grew by $24.3 billion during that time. That’s a true tax rate of just 0.1%.
Who Can Use This Strategy
You need serious wealth. We’re talking millions in assets that banks will accept as collateral. Most regular people can’t get low-interest loans against their stock portfolios.
But here’s the thing: this strategy shows how our tax system favors wealth over wages. Your paycheck gets taxed before you even see it. Billionaire wealth just sits there growing, untaxed.
2. Charitable Remainder Trusts – Get Paid While Getting Tax Breaks
What if you could avoid huge capital gains taxes, get lifetime income, AND get a big tax deduction all at once?
Welcome to Charitable Remainder Trusts (CRTs).
How CRTs Actually Work
You own stock worth $2 million that you bought for $200,000. If you sell it, you’ll pay about $300,000 in capital gains taxes.
Instead, you put the stock into a CRT. The trust sells it tax-free. Zero capital gains tax.
The trust then pays you income for life. The annual payout must be between 5% and 50% of the trust’s value. Most wealthy people choose 5% to 8%.
When you die, what’s left goes to charity. But here’s the kicker: you get an immediate tax deduction for the present value of what will eventually go to charity.
Real Example That Shows the Power
Let’s say you put $2 million of appreciated stock into a CRT:
- You avoid $300,000 in immediate capital gains taxes
- You get a $600,000 tax deduction (saves you $200,000+ in income taxes)
- You receive $100,000+ per year for life
- Total tax savings: $500,000+
For those with significantly appreciated assets, a CRT allows you to preserve the full fair market value rather than reduce it by large capital gains taxes.
The Four-Tier Tax System
CRT payments get taxed in this order:
- Regular income first (highest tax rate)
- Capital gains second (lower tax rate)
- Tax-free income third (municipal bonds)
- Return of principal last (no taxes)
Smart, wealthy people structure their CRTs to get more payments from categories 2, 3, and 4.
Who This Works For
You need at least $1 million in assets that have grown a lot in value. You also need to actually care about charity – this isn’t just a tax trick.
The best part? You may change the charitable beneficiary during your life. Start with one charity, switch to another later.
3. Partnership Basis Shifting – Making Billions Disappear Through Business Structures
This one is so sneaky that the Treasury Department had to issue a special warning about it.
Large, complex partnerships use opaque business structures to inflate tax deductions and avoid taxes. Once complete, Treasury estimates this could cost more than $50 billion over 10 years.
How the Shell Game Works
Rich people don’t just own one business. They create dozens of partnerships that all own pieces of each other. It’s like a financial house of mirrors.
Here’s the trick: They shift tax basis from property that doesn’t generate tax deductions (like stock or land) to property that does (like equipment).
Think of it this way. You have a $10 million building (no tax deductions) and $10 million in equipment (big tax deductions). Through partnership tricks, you make the paperwork show you have a $1 million building and $19 million in equipment.
Same total value. Way more tax deductions.
The Depreciation Game
Even worse: Taxpayers use these techniques to depreciate the same asset over and over.
One piece of equipment. Multiple partnerships. Each one claims depreciation deductions on the same machine.
Why They Get Away With It
Audit rates for large partnerships fell from 3.8% in 2010 to just 0.1% in 2019. The IRS simply can’t keep up.
Filings from pass-through businesses with more than $10 million in assets increased 70%, from 174,100 in 2010 to 297,400 in 2019.
More complex partnerships. Fewer audits. You do the math.
The Real Cost
Wealthy taxpayers and businesses are paying accountants and lawyers millions of dollars to develop these complex, abusive transactions, costing the federal government billions of dollars each year.
Your tax bill goes up because theirs goes down.
Who Can Use This
This requires massive business operations and teams of expensive tax lawyers. Not something regular people can do.
But it shows how the tax code helps big business while regular companies pay full freight.
4. The Carried Interest Loophole – Why Wall Street Pays Less Than Teachers
Here’s something that will make you mad. Hedge fund managers and private equity executives pay roughly half the tax rate that most workers pay.
How Carried Interest Turns Wages Into Capital Gains
Private equity managers raise money from investors. They buy companies. When they sell those companies for profit, they get a cut called “carried interest.”
Normal people would pay 37% income tax on that money. But fund managers pay just 20% capital gains tax instead.
Here’s the trick: they claim their wages are actually “investment returns.” The carried interest loophole allows private equity barons to claim large parts of their compensation for services as investment gains.
The Math Makes You Sick
A couple filing jointly making under $206,700 faces a 22% tax rate, while a single person making under $197,300 is taxed at 24%.
But private equity executives making millions? They pay 20%.
Real Money, Real Impact
CalPERS, the largest U.S. public pension fund, paid $3.4 billion in carried interest to private equity firms from 1990 to 2015. That’s money taken from teacher and firefighter pensions.
According to Treasury estimates, closing this loophole would raise $6.5 billion over 10 years.
The Political Reality
Both parties say they want to close this loophole. President Trump wants to end the carried interest loophole. Democrats have been trying for years.
But the American Investment Council spent $710,000 in the first quarter of 2025 lobbying to preserve the loophole.
Guess who wins?
Who Benefits
Only private equity, venture capital, and hedge fund managers. These are some of the highest-paid people in America. They don’t need tax breaks.
But they have great lobbyists.
5. Private Placement Life Insurance – Turning Life Insurance Into a Tax-Free Investment Account
The ultra-wealthy figured out how to turn life insurance into a tax-free investment fund. The domestic PPLI industry is now worth at least $40 billion in policies held by only a few thousand individuals.
How PPLI Beats Regular Investing
Regular investing works like this: you make money, pay taxes on gains every year, and hope there’s something left.
PPLI works like this: All investment growth within the policy accumulates free from income taxation. Forever.
Want to access your money? Take policy loans without triggering taxable events. The loans never have to be paid back in your lifetime.
When you die? Beneficiaries receive the insurance proceeds income-tax-free.
What You Can Invest In
Forget the boring mutual funds in regular life insurance. With PPLI, you can hold:
- Hedge funds
- Private equity
- Real estate partnerships
- Pretty much any investment
Unlike most life insurance policies, PPLI is designed to minimize insurance costs and maximize investment growth.
The Real Numbers
PPLI represents just 0.003% of all individual life insurance policies in the United States. But these policies hold massive wealth.
You typically need to invest at least $1 million to $5 million to start. Most wealthy families fund $3 million to $5 million per year for several years.
Why The IRS Hates This
There is no requirement to report ownership of PPLI on a tax return, allowing wealthy investors to shield lucrative investments from IRS scrutiny.
Marketing materials from PPLI providers explicitly promoted these products as tax-free investments in private equity and hedge funds, as well as a means to dodge income, gift and estate taxes.
Who Qualifies
You need an annual income in the millions, a net worth of $20 million or more, or control of a business in that category.
For everyone else, this is just another way the ultra-wealthy rig the system.
6. The Stepped-Up Basis Loophole – How Inheritances Wipe Out Lifetime Capital Gains
This might be the biggest tax loophole in America. It shields trillions of dollars of investment income from taxation.
Here’s how it works: when rich people die, their heirs inherit assets at current market value. All the capital gains from the dead person’s lifetime just disappear.
A Simple Example That Shows the Scam
Your rich uncle bought Apple stock for $100,000 in 1990. When he dies in 2025, it’s worth $10 million.
If he sold it before dying, he’d owe taxes on $9.9 million in gains. But he didn’t sell. He died instead.
You inherit the stock. Your basis is now $10 million – the stock’s value when you inherited it. You sell it the next day for $10 million.
Your capital gains tax? Zero.
The Numbers Will Shock You
The wealthiest 1% own 44% of all unrealized capital gains – $21.2 trillion worth.
The 64,000 American households worth $100 million or more hold almost one-fifth (18%) of all unrealized gains, or $8.5 trillion.
In 2019, 56% of the tax benefits went to the top 20% of estates, with $7 billion going to the top 1%.
Research Shows the True Impact
A new National Bureau of Economic Research study found that the top 400 wealthiest Americans paid an average effective tax rate of 24% from 2018-2020, compared with 30% for the full population.
As a fraction of wealth, taxes paid by the top 400 dropped from 2.7% before the 2017 tax cuts to 1.3% afterward.
Why This Matters for Everyone
Rich families pass billions from generation to generation without ever paying capital gains taxes. This creates an incentive to continue passing assets from one generation to the next within the same family, contributing to wealth concentration.
Meanwhile, you pay taxes on every dollar you earn.
Reform Attempts
The Biden-Harris Administration’s plan would tax gains over $10 million per couple when received as gifts or inheritances. But with Trump back in office, don’t expect changes soon.
Who Benefits Most
Anyone with huge capital gains. But for most families, the bulk of any unrealized gains they own is in their home, which is regularly taxed through property taxes.
For billionaires? 93% of their unrealized gains come from business and financial wealth that’s never taxed until sold.
7. Business Loss Magic – How the Rich Turn Losses Into Tax Gold
Rich people lose money on purpose. Then they use those losses to wipe out taxes on their other income.
Net Operating Loss Carryforwards
When your business loses money one year, IRS rules let you carry that loss forward to reduce taxable income in future profitable years.
This makes sense for small businesses. Bad year, good year – things balance out.
But wealthy people game this system. They start businesses designed to lose money early, then use those losses to offset gains from their other investments.
The Pass-Through Deduction Goldmine
The 2017 tax law created a 20% deduction for pass-through business income. Sounds fair, right?
Wrong. 61% of its tax benefits go to the top 1% of households.
In 2021, more than 53% of the total pass-through deduction was claimed by filers reporting more than $500,000 in income.
How They Stack the Deck
The new House Republican plan proposes increasing the pass-through deduction from 20% to 23%. More tax breaks for people who already pay low rates.
Meanwhile, wealthy households benefit the most because they receive most pass-through income and get the largest tax break per dollar deducted since they’re in the top tax brackets.
Tax Loss Harvesting on Steroids
The wealthy sell investments when they’re low, then make other similarly valued investments, balancing out gains with losses while keeping money invested.
You can do this too. But the wealthy do it with millions of dollars across dozens of investment accounts.
Real Estate Depreciation Tricks
Buy a $10 million apartment building. Claim it’s wearing out over 27.5 years. That’s $363,636 in “depreciation” deductions every year.
But the building might actually be going up in value. You get tax deductions for imaginary losses while building real wealth.
Who Can Play This Game
You need multiple income streams and enough wealth to absorb losses in some areas while making gains in others.
Regular people with one job can’t manufacture business losses to offset their wages.
What to Do Next – Your Action Plan
Now you know how the game is played. Here’s what you can actually do about it.
If You Have Serious Money ($1M+ Net Worth)
Start with the easiest wins:
- Tax-loss harvesting: You can do this in any brokerage account
- Charitable remainder trusts: Talk to an estate planning attorney
- 1031 exchanges: If you own investment real estate
Don’t try the complex stuff alone. Partnership basis shifting and PPLI need teams of specialists.
If You’re Still Building Wealth
Focus on tax-advantaged accounts first:
- Max out 401(k), IRA, and HSA contributions
- Use backdoor Roth conversions if you qualify
- Consider real estate for depreciation benefits
Remember: these wealthy strategies work because they have money to lose. Build wealth first, then worry about protecting it.
Get the Right Help
You need specialists, not your regular tax preparer:
- Estate planning attorneys for CRTs and inheritance strategies
- Tax attorneys for complex business structures
- Fee-only financial advisors who don’t sell products
- CPAs specializing in high-net-worth clients
Warning: Bad advice costs more than good advice. Don’t cheap out.
Know the Political Reality
These loopholes exist because wealthy people have great lobbyists. The American Investment Council spent $710,000 in just three months lobbying to keep carried interest alone.
Want change? Support politicians who actually vote to close loopholes, not just talk about it.
